ONE Gas(OGS) - 2019 Q3 - Quarterly Report

Part I. Financial Information Consolidated Financial Statements (Unaudited) Presents ONE Gas, Inc.'s unaudited consolidated financial statements for Q3 2019, detailing income, balance sheets, cash flows, and accounting policies Consolidated Statements of Income (Unaudited) | (Thousands of dollars, except per share amounts) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $248,563 | $238,280 | $1,200,123 | $1,169,265 | | Operating income | $38,777 | $36,241 | $213,287 | $207,574 | | Net income | $17,457 | $16,276 | $135,587 | $127,530 | | Diluted EPS | $0.33 | $0.31 | $2.55 | $2.41 | Consolidated Balance Sheets (Unaudited) | (Thousands of dollars) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $389,683 | $543,287 | | Net property, plant and equipment | $4,488,468 | $4,283,712 | | Total assets | $5,533,180 | $5,468,642 | | Total current liabilities | $677,755 | $698,891 | | Long-term debt | $1,285,937 | $1,285,483 | | Total equity | $2,101,881 | $2,042,656 | | Total liabilities and equity | $5,533,180 | $5,468,642 | Consolidated Statements of Cash Flows (Unaudited) | (Thousands of dollars) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Cash provided by operating activities | $288,543 | $436,768 | | Cash used in investing activities | ($308,817) | ($279,346) | | Cash provided by (used in) financing activities | $11,513 | ($159,405) | | Change in cash and cash equivalents | ($8,761) | ($1,983) | Notes to Consolidated Financial Statements Details key accounting policies, including lease standard adoption, revenue, debt, regulatory matters, and environmental contingencies - Adopted new lease standard (Topic 842) on January 1, 2019, recognizing approximately $32 million in lease liabilities and corresponding right-of-use assets[41] - The 2017 Tax Cuts and Jobs Act required a remeasurement of Accumulated Deferred Income Tax (ADIT), which was recorded as a regulatory liability to be refunded to customers. During the nine months ended Sep 30, 2019, the company credited income tax expense by $10.3 million for the amortization of this liability[81][84] - The company has a $700 million revolving credit facility, extended to October 2024, and a commercial paper program of up to $700 million. As of Sep 30, 2019, $395.0 million of commercial paper was outstanding[54][58] - The company is responsible for environmental remediation at 12 former Manufactured Gas Plant (MGP) sites in Kansas and one in Texas. Costs in Kansas are partially recoverable up to a $15.0 million cap under an Accounting Authority Order (AAO)[88][92][93] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Details the company's financial performance, regulatory activities, and liquidity, including net income growth, capital expenditures, and tax act impacts Recent Developments Highlights the ongoing process of refunding excess deferred income taxes and the declaration of a quarterly dividend - The company is working with regulators to refund excess Accumulated Deferred Income Tax (ADIT) to customers as a result of the 2017 Tax Cuts and Jobs Act[112] - A dividend of $0.50 per share ($2.00 annualized) was declared in October 2019[113] Regulatory Activities Details recent regulatory filings and outcomes across service areas, including customer credits and rate increases in Oklahoma, Kansas, and Texas - Oklahoma: An August 2019 settlement includes a $15.6 million PBRC credit to customers beginning in Q3 2019 and a $12.7 million credit for excess ADIT to be issued in 2020[115] - Kansas: A February 2019 order resulted in a net base rate increase of $18.6 million and a $16.6 million refund to customers for 2018 tax savings, which was issued in Q2 2019[118] - Texas: GRIP filings in 2019 resulted in approved rate increases of $4.1 million in the West Texas area and $5.5 million in the Central Texas area[119][121] Financial Results and Operating Information Analyzes financial results for the nine months ended Sep 30, 2019, highlighting net income growth, net margin drivers, and changes in operating costs Net Margin on Natural Gas Sales (9 Months Ended Sep 30) | (Millions of dollars) | 2019 | 2018 | Increase (Decrease) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net margin on natural gas sales | $596.6 | $569.7 | $26.9 | 5% | | Transportation revenues | $82.9 | $79.5 | $3.4 | 4% | | Total Net Margin | $702.8 | $673.4 | $29.4 | 4% | - The $29.4 million increase in net margin for the nine months ended Sep 30, 2019, was primarily driven by: - $21.6 million from new rates - $4.8 million from residential customer growth in Oklahoma and Texas - $1.6 million from higher transport volumes in Kansas[132] - Capital expenditures and asset removal costs are expected to be approximately $450.0 million for 2019, an increase from prior periods due to system integrity activities and service expansion[136] Liquidity and Capital Resources Discusses the company's liquidity and capital resources, including operating cash flow, credit facilities, commercial paper, and debt-to-capital ratio - The company relies on operating cash flow, a $700 million commercial paper program, and a $700 million revolving credit facility (expiring Oct 2024) for liquidity[143][149][153] - As of Sep 30, 2019, the total debt-to-capital ratio was 44%, in compliance with the credit agreement's covenant of no more than 70%[150] - The company holds investment-grade credit ratings of A2 from Moody's and A from S&P[156] Environmental, Safety and Regulatory Matters Addresses environmental liabilities at MGP sites, compliance with PHMSA pipeline safety regulations, and participation in EPA methane reduction programs - The company is responsible for environmental conditions at 12 former MGP sites in Kansas and one in Texas[164][168] - On Oct 1, 2019, PHMSA published a final rule expanding pipeline integrity management requirements; compliance costs are not expected to be material. Two additional rulemakings are pending[173][175] - The company participates in the EPA's Natural Gas STAR Methane Challenge Program, committing to replace at least 2% of its cast iron and unprotected steel pipe inventory annually, a goal it exceeded in 2018[181] Quantitative and Qualitative Disclosures About Market Risk Details the company's primary market risks, including commodity price, interest rate, and counterparty credit risks, and their respective mitigation strategies - Commodity price risk is mitigated by purchased-gas cost adjustment mechanisms and the use of derivative instruments to hedge the cost of anticipated natural gas purchases[192] - Interest-rate risk on future borrowings is managed through a mix of fixed-rate debt, floating-rate debt, and potentially interest-rate swaps[193] - Counterparty credit risk is considered low due to a large, diversified customer base of approximately 2.2 million across three states[194] Controls and Procedures The CEO and CFO affirmed the effectiveness of disclosure controls and procedures, with no material changes to internal control over financial reporting in Q3 2019 - Disclosure controls and procedures were deemed effective by the Principal Executive Officer and Principal Financial Officer as of the end of the reporting period[195] - No material changes in internal control over financial reporting occurred during the third quarter ended September 30, 2019[196] Part II. Other Information Legal Proceedings The company is involved in various legal proceedings, with management expecting no material adverse effect on its financial position or operations - The company states that ongoing legal proceedings arising from normal operations are not expected to have a material adverse impact on its financial results[197] Risk Factors Refers investors to the comprehensive risk factors detailed in the company's Annual Report on Form 10-K, which could materially affect financial performance - Investors are directed to the Risk Factors section of the company's Annual Report for a comprehensive discussion of risks affecting the business[198] Unregistered Sales of Equity Securities and Use of Proceeds This item is reported as not applicable for the current reporting period - The company reports this item as 'Not applicable'[199] Exhibits Lists exhibits filed with the report, including credit facility amendments and officer certifications required by the Sarbanes-Oxley Act - Filed exhibits include a First Amendment and Extension Agreement to the company's credit facility, and officer certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[204]